Single-premium plans are in vogue, but should you go for them?

MUMBAI: With the tax-saving season settling in over the last two weeks, the market has seen a variety of products being launched by insurance companies and mutual funds. After all, this is the time when salaried taxpayers look out for products where they can direct their money and also save on tax outgo in the process.

This year, with the possible implementation of the Direct Tax Code looming large, tax-planning could be a bit complicated. This is because, certain provisions of DTC, some tax experts say, will be effective retrospectively, which is not good news for all life insurance policies. For one, only those life policies where the sum assured is at least 20 times the annual premium will be considered for this exemption. Today, many popular endowment plans do not meet this norm, which means that your premium next year will not secure any tax benefits for you, should the DTC in its current form come into force from April 1, 2012.

Besides, DTC seeks halve the deduction amount available at present to Rs 50,000. While doubts linger over DTC's implementation this year, some insurance companies seem to be taking no chances. To counter the ambiguity its proposed provisions have generated, a couple of life insurers like Bajaj Allianz and Star Union Dai-ichi have lined up endowment policies with a single premium option and guaranteed maturity benefits. This eliminates the concerns around the subsequent years' premium eligibility.

Tax-saving not the sole parameter

However, financial planners say that since life policies entail recurring payments over the long-term, it should not be bought with solely tax-saving for the year in mind. They also recommend keeping investment and insurance objectives separate. Therefore, you would do well to consider your cashflows, needs and goals as key determinants while evaluating a single-premium policy purchase.

Merits of single-premium

As life insurers would say, a single-premium plan secures your family's financial protection at one go, doing away with the obligation of annual payments. It would also suit the requirements of those with an unpredictable, seasonal or uneven income stream. Likewise, if you have earned a handsome bonus or have made a windfall gain from say sale of a property, you can consider direct your money to single-premium plans.

What's more, agents' commission - which are deducted from your premium in the form of charges before it is invested - is capped at just 2% as per law. Besides, a single-premium plan will not attract annual administration charges, too. This means that more of your money will be invested as against regular policies where the charges corner a sizeable chunk of the premium.

Watch out for the pitfalls

However, it is obvious that all the benefits mentioned earlier will accrue to you only if you can actually afford the single premium as it will be significantly higher than annual premiums. Moreover, one of the biggest hitches, especially if your objective is tax-saving, is the 80C provision pertaining to the premium-to-SA ratio. While DTC to proposes 20 times cover as the minimum criterion, even at present, such plans will be eligible for deduction only up to 20% of the sum assured. For instance, if your one-time amounts to Rs 50,000 and the cover is Rs 1 lakh, only Rs 20,000 will be allowed as deduction.

Carry out a close scrutiny

Then, of course, you also need to ascertain the attractiveness or otherwise of the individual product's offerings. In case of endowment policies as a product category, financial planners have always considered lack of transparency in charge structure as a key drawback. Also, compare the guaranteed returns promised with the fixed deposit rates being offered by banks, especially considering that FD rates are reigning high at the moment.

And finally, you shouldn't forget that if you wish to intend a lump-sum, a single premium policy - be it endowment or Ulip - is not the only option. You can look at more liquid options like mutual funds (particularly by adopting the systematic transfer plan route), stocks and other investment avenues before taking settling for single premium plans.